Renting Dirt to Owner-Occupants

Today’s title sounds like an oxymoron but it couldn’t be closer to the truth. What I am discussing today is mobile home parks. Managed properly these are a fantastic commercial real estate investment. Done wrong and they become a landlord’s worst nightmare.

Here’s how to do it wrong. As a novice real estate investor, look at the “potential” revenue from a mobile home park that is half owner occupied and half of the trailers are owned and rented out by you. Of the 100 spaces, 50 with trailers owned by you are rented for $550 per month ($550 X 50 = $27,500). The other 50 are owner occupied but the dirt only rents for $300 ($300 X 50 = $15,000). Total “potential” monthly rent comes to $42,500.

Why You Don’t Want to Rent Mobile Homes

Now, let’s look at what the “potential” numbers don’t tell you. Mobile home renters are very low on the economic ladder. These people often have credit scores so low they don’t even register as relevant.

Employment-wise, they are highly unstable. They are also much more transient than mobile home owners. After their first month rent and deposit is gone and they lose their job, they disappear into the night. What they leave behind are broken down cars, overflowing garbage cans, and busted out interior walls to the mobile home that you own. Your chance of collecting pass due rent and damages is pretty much zero. Your cost to clean the place up to put in another renter is over $700.

What new trailer park investors need to understand is that along with higher rental revenue come expenses upward of 70% of the income. The real “potential” net operating income is only $12,750 ($42,500 X 30%) and it comes with boat load of headaches.

Only Rent the Dirt

Now, contrast that with trailer parks that are 100% owner occupied that you only rent the dirt to park their mobile home on. The “mobile” in mobile homes isn’t very mobile. The cost to move a mobile home varies but is typically $3,000 or more – if the owner can even find another park that will accept them. That means mobile home owners are motivated to stay at the park they are currently in.

These people are homeowners. They have more than a “rental deposit” at stake. If they bust out a wall, it’s their wall, not yours. You can make rules like keeping the lawn mowed and the yard clean and they will follow the rules because they can’t afford to move their home.

You don’t even need to have all the spaces rented to have a better revenue stream. If you rent 75 of the 100 spaces to owner occupied tenants, your monthly rental revenue becomes $22,500 ($300 X 75). Your expenses amount to about 10% of the revenue or $2,250 ($22,500 X 10%). Your monthly net operating income is $20,250 ($22,500 – $2,250). That’s a whooping increase of $7,500 ($20,250 – $12,750). Best of all, it comes without the landlord headaches associated with rented mobile homes.

Here is how you formulate a purchase price offer for a mobile home park. Completely discount all of the rental mobile homes. You can calculate future value for renting the dirt but don’t count on rent from the current tenants. Your plan is to sell the mobile homes that are salvageable and pay to have the worst ones hauled away. Sell the salvageable homes to new owners and start collecting rent for only the dirt. Allow owners to move in their own homes into spaces vacated by the mobile homes you had to have hauled away.

Once you improve the park, you’ll soon reach close to 100% owner occupancy. Your revenue stream will grow to $30,000 ($300 X 100) and expenses will be limited to $3,000 ($30,000 X 10%). Your monthly net operating income jumps to $27,000.

The only way to succeed as an investor in a mobile home park is with tenants that have the pride of homeownership. That’s where the real money is.

Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.